How You Should Plan For Avoiding Mutual Fund Capital Gain Taxes On Distributions

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According investmentnews.com, Autumn is harvest time, and its time for mutual funds to announce their capital gains distributions.  With the good gains expected from equity in this active market, and with many investors redeeming out of active funds into index funds and EFTs, this will most likely be a stressful tax season for most investors.

Don’t Swim With Sharks

No one should even try to navigate the waters without professional help.  Do not swim with sharks. It remains a truism, irrespective of how long you invested in a fund or whether positive returns is your burden.

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Non-Qualified Accounts

Capital gains taxes are only payable if you hold your funds in non-qualified accounts.  If you own funds outside your retirement accounts, one way of avoiding the tax burdens is if you sell your fund positions before the capital gains distribution date in late December.

On the other hand, if you do sell before the distribution date, you might be liable for taxes related to the fund’s performance.
Some experts advise you to ride out the annual capital gains hit but to use the yearly cost-basis adjustment as a prepayment on those taxes that are due based on the fund’s performance

Shrewd investors who understand that actively managed funds have a lowered net asset value in proportion to the capital gain after the annual distribution. This is an excellent time to buy.

You cannot avoid a tax bill altogether, although you can make life a lot easier if you navigate capital gains distributions in the right way.



All About Portfolio Turnover

Most actively managed funds cause liability for capital gains, but there are approximately 700 funds we know of that had no capital gains one year ago, 500 that had no capital gains over the past three years and 300 that had no capital gains over the past five years. It is all about portfolio turnover.

Vanguard’s Tax-Managed Capital Appreciation Fund (VTCIX) that boasts an annual turnover rate of six percent was designed for tax management; hence, it has not distributed capital gains in over five years.

The same goes for the JPMorgan Emerging Markets Equity Fund (JMIEX), a $6,2 billion fund, with a yearly turnover rate of 13% and the $30.4 billion DFA International Core Equity Fund (DFIEX) with its annual 4% turnover rate. Neither of these has distributed capital gains over the past five years.

Trending Toward Passive Index Funds

The trend is definitely toward passive index funds and exchange-traded products that are more tax-efficient and less costly.  If you add index funds to the list of funds that distributed no capital gains over one, three, or five years, the list of 700 grows to more than 2,900.

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Low Turnover Rates Are Management Specific

As a rule, active funds with low turnover rates have stable assets, or their assets are growing. Low turnover rates are indicative of predictability.  When there are few redemption, we know that there is stability: no weak performance-driven action or changes in portfolio management but rather a longer-term outlook. Sometimes it is specific to a portfolio manager, so it is vital to take note of manager turnover. Bring in someone new, and everything can change.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services.  This article cannot serve as a substitute for such professional services or advice.  Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation.  This article is subject to change at any time and for any reason. Click to mail us and create the best tax plan for you hedge and private equity funds



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Fulton Abraham Sanchez, CPA

Fulton Abraham Sánchez, CPA I am Certified Public Accountant, specialized in Tax Planning & Offshore Strategies for Real Estate, Hedge/Equity Funds, Fintech, Crypto, Expats, IRS Debt Resolution. You can email me fa@fascpaconsultants.com and follow us on Facebook : FAS CPA & Consultants.

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